AMD-ATI Deal Won’t Stop Shaking For A While

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On Monday, AMD agreed to acquire graphics powerhouse ATI Technologies in a surprise $5.4 billion deal that will radically alter the landscape of the PC component industry.

If agreed to by shareholders, the deal will require AMD to pay $4.2 billion in cash plus 57 million shares of AMD common stock, which the company is valuing at $18.26 per share. ATI will become “the ATI business division” within AMD, and its chief executive and president, Dave Orton, will become an executive vice president reporting to both AMD president and chief operating officer Dirk Meyer and AMD’s chief executive, Hector Ruiz.

“Good morning – indeed, this is a great morning,” Ruiz said in introducing the deal to analysts and journalists in a conference call Monday morning: “We intend to create a processing powerhouse.”

The combination would create a company with an estimated $7.3 billion in sales. Even combining ATI’s established core logic and graphics expertise with AMD’s microprocessors, however, the merged entity will still trail Intel in both total revenue as well as market share in chipsets and microprocessors. In graphics, however, the market can be assessed in different ways; while Intel still holds a significant lead over ATI and rival Nvidia in total graphics chips shipped, Intel’s edge disappears if integrated graphics/core logic chips are factored out of the equation.

Read Loyd Case’s commentary on where this leaves Nvidia.

ATI said it has received an opinion from its financial advisers that the transaction from a financial point of view is fair to its shareholders. Meanwhile, AMD said it expects that the transaction will be slightly accretive to earnings in 2007, and “meaningfully accretive” in 2008. Shareholders from both companies must still approve the transaction, which would then most likely be finalized during the fourth quarter of 2006, AMD said.

In 1995, AMD bought NexGen for nearly $1 billion; the company’s design expertise has guided the company for arguably ten years, producing the Athlon, AthlonXP, and later the 64-bit Opteron generation. With rival Intel learning the lessons that guided AMD and introducing the Conroe or Core 2 Duo processor, AMD theoretically had a choice to buy a company to enhance its core CPU technology. Instead, it grew its overall business. Did the company make the right choice? Analysts said it did.

“The deal makes sense on a variety of levels,” said Sam Bhavnani, an analyst at Current Analysis. “AMD’s game has been in corporate servers, and the other has been in consumer PCs. Long term, one of AMD’s biggest strategies has been to get in the corporate client, whether it be the notebook or the desktop. Not having a stable image – the chipset – has handicapped AMD in that area. So they ask themselves, do we have a good offering for what win at, or do we have a good offering for corporate?”

The thought process, Bhavnani said, was probably similar to what a baseball general manager asks himself in July – grow a championship team through the minor leagues or buy yourself a winning team through the free agent market? “Their answer was to try and go out and field an All-Star team at the break.”

The deal will be accretive in the hundreds of millions of dollars in 2007, and in the billions from then on, according to Bob Rivet, AMD’s chief financial officer.

AMD has historically struggled with debt as it struggled to build new fabs to compete with Intel, which has traditionally held more than five times the market share of AMD in the PC microprocessor space, and has sold core logic and communications chips to boot.

However, AMD said it will fund the acquisition through a combination of cash and new debt. AMD obtained a $2.5 billion term loan commitment from Morgan Stanley Senior Funding, Inc. which, together with combined existing cash, cash equivalents, and short term investments balances of approximately $3.0 billion, provides full funding for the transaction, AMD said.

The Questions

The deal has implications on a number of levels, some that may require some time to digest.

First and foremost, the deal will see the two companies integrate their technologies as well as their corporate structures: by 2008, the combined ATI-AMD company plans to offer integrated CPU-GPU products that leverage the strengths of each company. The chips, which will either combine the two cores on a single die or else in a single package, hearken back to the turn of the decade, when AMD’s “Geode” and Intel’s “Timna” were seen as the future direction of the industry.

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